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Slicing up Oil Assets Volume 7, Issue 28

As the commodity price of oil plummets along with the advent and introduction of renewable energies, the following is likely to become more the norm than the exception:

MOSCOW - For sale in Russia: one repossessed asset, well loved and maintained. Seller is motivated. Everything must go.1

The asset is Bashneft, the oil company once owned by Vladimir P. Yevtushenkov, who was prosecuted and put under house arrest. And the seller is the Russian state, in desperate need of cash. The sale and dozens of others taking place around the country, will reinforce Russia's reputation in the global markets for uncertainty.

Earlier in his tenure, President Vladimir V. Putin pursued a policy of controlling the so-called commanding heights of the economy with a nationalization drive that pushed Russian and foreign owners out of strategic industries. Now he is inviting investors back, as Russia faces the economic fallout from a second year of Western sanctions and low commodity prices.

Bashneft, Russia's sixth-largest oil company was first privatized in the early 2000s. It was renationalized in 2014 when Mr. Yevtushenkov was put under arrest. Now it is for sale again. "Any buyer today should understand the risks," Alexandr Y. Abramov, a professor at the higher school of economics of Moscow, said of the latest planned resale of 51 percent of Bashneft.2

Such uncertainty is a big reason investors remain uneasy. Consider the differing perceptions of Brazil and Russia. Both are big commodity exporters facing serious economic troubles. But investors are willing to pay only about half as much for the Russian company as for the Brazilian firm with the same earnings potential, according to Renaissance Capital, a Moscow bank. Indicative of Russia's stock troubles is Gazprom, the state-controlled oil giant. Its market value dropped to about $50 billion in late June, down from its peak in May 2008 of $367 billion.

Russia's mighty oil, mining, and industrial holdings looked like a good deal in the 1990s during the transition from communism to capitalism. Privatization took place on a much wider scale in the early 1990s, when the government of Russia deliberately set a goal to sell its assets to the Russian public. Upon the Soviet Union's collapse, the successor government of the Russian Federation was forced to manage the huge and inefficient state enterprise sector inherited from the Soviet economy.

Privatization was carried out by the State Committee for State Property Management of the Russian Federation with the primary goal being to transform the formerly state-owned enterprises into profit-seeking businesses, which would not be dependent on government subsidies for their survival. To distribute property quickly and to win over popular support, the reformers decided to rely mostly on the mechanism of free voucher privatization. The Russian government believed that the open sale of state-owned assets, as opposed to the voucher program, would have likely resulted in the further concentration of ownership among the mafia and the former Soviet political and industrial elite, which they sought to avoid. Nevertheless, contrary to the government's expectations, insiders managed to acquire control over most of the assets, which remained largely dependent on government support for years to come.

Although several of the initial objectives had not been fully achieved by the end of the vouchers program, a great deal of assets did fall into private ownership remarkably quickly and worked to provide some basis for market competition. Voucher privatization took place between 1992 and 1994. Roughly 98 percent of the population participated. The vouchers, each corresponding to a share in the national wealth, were distributed equally among the population, including minors. They could be exchanged for shares in the enterprises to be privatized. Because most people were not well-informed about the nature of the program or were very poor, they were quick to sell their vouchers for money, unprepared or unwilling to invest. Most vouchers - and, hence, most shares - wound up being acquired by the management of the enterprises. Although Russia's initial privatization legislation attracted widespread popular support given its promise to distribute the national wealth among the general public and ordinary employees of the privatized enterprises, eventually the public felt deceived and the chaotically run deal largely crashed and burned.3

Needing money ahead of an election in 1996, President Boris N. Yeltsin tried catering to rich insiders. He sold companies at bargain-basement prices to a new class of high-rolling Russians. After Mr. Putin assumed power in 1999, he vowed to eliminate these oligarchs as a class.' Three years later, the police arrested Mikhail B. Khodorkovsky, then Russia's richest man as owner of the Yukos oil company, bought in the sale under Mr. Yeltsin.

The primary pumping asset became Rosneft, the state oil company. Rosneft was partly privatized: The state sold 13 percent on the London Stock Exchange in 2006.

In 1993, the Russian government transferred Bashneft to the regional government at Bashkortostan, at a time when Mr. Yeltsin was trying to get on the good side of local leaders. In the early 2000s, the regional government sold shares to a company owned by local elites, Ural-Invest. In the years after, Mr. Yevtushenkov picked up shares through a holding company called Sistema, in deals that were certain to have been approved by the Kremlin.

But in 2014, prosecutors said the company's original transfer - 21 years prior - to a regional government had been illegal. All subsequent transactions were cancelled. Mr. Yevtushenkov was ensnared by a flurry of criminal and civil cases. His shares were handed over to the state. He was finally cleared late in 2015. Sistema won $950 million in a lawsuit against the previous owner, Ural-Invest.4

In April, Mr. Putin removed Bashneft from a list of strategically important companies, despite oil reserves of 2.2 billion barrels. The move clears the way for the company's sale to overseas investors. The government also plans to offer shares in Sovcomflot, a shipping firm: Alrosa, a diamond mining company: VTB, a state bank: and Rosneft. The government needs money to cover a portion of the country's projected deficit this year of some 2.4 trillion rubles ($36 billion), up from 1.95 trillion rubles ($31 billion) last year.

And the privatization push is one of the few ways for the government to raise capital. Western sanctions over the Ukraine crisis make it difficult for Russia to hold bond sales, a common way for governments to cover budget difficulties.

Rosneft will be selling off 23.8 percent of the Vankor oil field to its Indian counterparts, Oil India, Bharat PetroResources, and Indian Oil, according to a report by Forbes. The Russian firm had been in discussions for this deal, as well as several others, for nearly a year before making the announcement last week. Up to 50 percent of the crude produced by the field would be directed out of the east Siberian field to Indian-owned sites, the Russian business source Vedamosti said.

A total of 520 million tonnes of recoverable oil lay in the fields, according to geological estimates. The three Indian firms paid $2.1 billion to access the energy resources hidden in the area.

The government-owned Indian firm ONGC bought a 15 percent share of Vankorneft a subsidiary that runs Vankor - last month for the price of a little over $1.5 billion. Rosneft has reportedly been interested in selling an even larger number of shares to Chinese firms. Almost a fifth of the Russian company's assets could be in the hands of China or India by the time the dump is over.

The Indian Oil Minister, Dharmendra Pradhan, said he would not oppose becoming a co-stakeholder with China as his country does not "rival China in the energy sector."

In May, Aleksei L. Kudrin, a former minister of the economy, suggested the Kremlin could also spur growth by easing International tensions. Mr. Putin responded that Russia would not "bargain with its sovereignty."